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Debate: Should Clients Use a Backdoor Roth IRA in 2022?

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High-income clients are prohibited from contributing directly to a Roth IRA. Instead, those clients often fund a traditional IRA and convert the traditional IRA to a Roth. This strategy has become known as the backdoor Roth IRA strategy.

While the legislation has not become law, the Build Back Better Act was set to eliminate the backdoor Roth IRA strategy as of Jan. 1, 2022. Because it remains possible that the legislation (or some version of the legislation) could be put to a vote this year, many clients wonder whether it’s still OK to execute a backdoor Roth strategy in 2022.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about using a backdoor Roth IRA in 2022.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Byrnes

Bloink

Their Reasons:

Byrnes: Congress has yet to take any type of tangible action that would limit or prohibit the use of backdoor Roth IRAs for any client, regardless of income. However, the action has been threatened and seemed to have significant support late in 2021 — meaning that we could see real legislative change soon. High-net-worth clients should act now to take advantage of a potentially limited window of opportunity to create a tax-free source of retirement income in later years.

Bloink: Roth IRAs were meant to provide a way for hardworking Americans to create a source of tax-free income in retirement — not as a loophole to allow wealthy taxpayers to exploit the tax code. While that’s often how these backdoor Roth IRAs are used (to get around the income restrictions that apply to Roths), it wasn’t the intent. High-net-worth clients should be wary of potential future challenges and restrictions on the backdoor Roth strategy and, conservatively, should hold off on funding a backdoor Roth until we know more about any new legislative proposals.

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Byrnes: Backdoor Roths are a completely legitimate way to fund a Roth IRA. The strategy has been controversial, but it has also been recognized, rather than challenged, by the IRS. I don’t see any reason why wealthy clients shouldn’t jump at the opportunity to fund a Roth while the strategy remains legitimate and legal, as they would with any other retirement income or tax planning strategy.

Bloink: I wouldn’t be surprised if Congress acted in the next year or two to limit the use of backdoor Roths. I also wouldn’t be surprised if Congress opted to make the new limitations retroactive, given the fact that high-income clients have already been put on notice about potential future limitations and changes. I’d say that it would be smartest for clients to take a wait-and-see approach, rather than rushing in and creating a potential tax headache down the line if Congress chooses to act later in 2022 and make those changes retroactive to Jan. 1.

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Byrnes: The fact that Congress may take action to limit the backdoor Roth is precisely why clients should act now. It’s very unlikely that Congress will elect to make any restrictions or limitations retroactive, given the political unpopularity of a retroactive change. If Congress does eliminate the backdoor Roth, we may be looking at the last chance for higher-income clients to fund valuable Roth accounts.

Bloink: It’s still early in 2022. Clients who are interested in funding a Roth IRA via the backdoor strategy have time to monitor developments in Congress and determine whether the risk is acceptable later in the year. For now, holding off seems like the most advisable approach to avoid the need to “undo” the Roth conversion at a later date — or risk a penalty for excess contributions.

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